When corporate innovative spirit goes stale, many corporations turn for their innovative ideas elsewhere. One popular source of new ideas and technologies is startups that may have the know-how but lack the complementary assets to see the new technology to fruition.
Corporations create special corporate venture capital programs to invest in startups – much like independent venture capitalists. Unlike independent VCs, however, they not only stand to gain from their investments financially but also hope to get a boost in innovativeness. Or so the reasoning goes. But does it hold against the hard evidence?
The good
It is generally true that heavy investments in startups through corporate venture capital programs lead to higher patenting rates. Scholars agree that as a window on technology, new ventures are quite useful to corporations that choose to support them.
Sometimes large companies work jointly with startups to improve their own products. Other times, they take advantage of the new technological insights and claim new ventures’ ideas as their own. At any rate, the link between CVC investments and corporate innovativeness is firmly established in the scientific research.
The bad
What is less known, however, is that enthusiastic support of startups through corporate venture capital programs is detrimental to large companies’ own R&D efforts. There are two primary reasons.
First, corporate resources are limited, and by channelling the money to CVC programs, the company diverts the money from its own in-house R&D projects. Effectively, corporations rob Peter to pay Paul. Second, it undermines the R&D unit morale by creating mistrust and propping the units against each other.
While in theory healthy competition may have its benefits, in practice it generates a lot of stress for the R&D employees and leadership, and scarce resources are wasted to fix unnecessary problems.
The ugly
The only condition when CVC and R&D programs go hand-in-hand is when the organisation has a lot of available resources, underutilised capacity, or both. I define it as organisational slack. Only then, robbing the R&D Peter is not necessary to pay the CVC Paul. Only then, in-house researchers do not feel threatened by the sudden emergence of alternative sources of innovative ideas. Only then can the employees’ concerns be effectively addressed.
The ugly truth is that few companies are in a position to reap such benefits but many engage in active CVC investments following the example of those companies who managed to succeed.
Implications
The implications of my study looking at corporate venture capital investments, R&D activity and corporate innovation in a sample of more than 160 corporations over the course of six years are straightforward.
Startups rarely complement corporations’ own R&D programs. If anything, they should be thought of as substitutes to in-house R&D. Unless the corporation has sizeable slack, chasing after two hares will likely get it nowhere. If, however, the company has too much slack on its hands, CVC investment is only one alternative, and careful cost-benefit analysis vis-à-vis other investment options is in order.